By Kim Folsom
This is Part 2 of our series on adding different revenue streams to your small business. Today I’ll talk about why recurring revenue is so crucial to keeping small businesses surviving — and thriving — in any business environment. Visit Part 1 here.
Businesses can grow their companies by any number of ways. For instance, they can add new customers. They can add new products and services. They can adjust their pricing. They can adapt their business model. They can even pivot in a wholly different direction.
But one of the most effective tactics for business success is to move from a transactional model to a recurring revenue model. By transactional, I mean that your customers make a single purchase, and then you have to work hard to get them to purchase again later. Recurring revenue usually comes from some type of subscription model or from contracts that establish a regular monthly payment for services performed.
Most businesses are made up of a combination of transactional and recurring revenues, but the more you can shift to recurring, the easier your life will be. Think of Amazon.com’s membership model: Amazon Prime. Prime has about 112 million subscribers who pay $119 a year for the service, which includes two-day shipping, Prime Video, and a host of other services. Most people put it on their credit card and forget about it.
Costco is similar. They raised their annual fee to $60 recently and you probably didn’t even notice. With 98 million members, that’s a lot of regular, recurring revenue that they can count on every month.
And of course both Amazon and Costco sell you a membership so you can buy more goods from them. It’s a thing of beauty.
Talking about these two behemoths may sound like a world away from small businesses who are trying to grow, or just scratch and claw to survive during the covid pandemic. But the lessons are the same whether you have $50,000 in revenue or $50 million. Recurring revenue can help your business survive during economic downturns like now. It can help you scale your company. It can help you improve overall customer satisfaction. And, if you’re looking for funding, it can improve your investment prospects.
Here are the top 7 reasons recurring revenue is so important to small businesses.
Whether it’s through a subscription or a contractual agreement, recurring revenue means predictability. Predictability not only helps you sleep at night, it helps you better manage your operations and plan for the future. If you knew you could count on $100,000 in revenue coming in every month, how much better could you plan your day-to-day operations and growth?
2. Better income management
Predictability leads to better income management, and better overall management of your entire business. Cash flow, after all, is the lifeblood of any business. When you can count on stable and growing cash flow quarter after quarter, your chances of success are much higher.
3. It’s easier for customers, too
Not only is recurring revenue easier on your business — it’s easier on your customers. They know what they are getting from you every month. They know exactly how much to pay, so there’s no surprises and they can budget accordingly. They can count on you. You’ve made a commitment to them just as they have to you. Plus, if they’ve signed a contract to provide you recurring revenue for goods or services, they’re going deep with you. They’re giving you a chance to address even more of their needs as you get to know them better. Which leads to….
4. More marketing opportunities
When you have your customer paying to be in your inner circle, you’d better service them well. You’d better get to know them and their needs. When you do that, and when you present your company as a solution to their problems, you’ll be able to increase engagement with your client or customer. The more you interact with them, the more touch points you have, the more you learn about them, the better you will be able to develop insights into their changing needs and demands, so you can offer them solutions to solve their problems. Upsells and add-on services shouldn’t be just a way to make more money off your customer. They’re a way to provide them additional value — which they may not have known you had to offer. You also might be able to leverage your customer relationships to enter new markets.
5. Higher lifetime value
Understanding the lifetime value (LTV) of your customer can be nirvana for predicting your bottom line. If you’re running a food truck that makes random stops around the city hoping to sell your burritos, you may not have any idea how much money you’ll bring in week to week. If you go to the same office park every day for lunch you might get a better idea. But if you’re selling a monthly subscription for frozen meals online that you ship to your customers, you’ll have a much clearer picture of your income. If you know your average customer buys 10 meals a week at $10 each and they stick around for 5 years, you can extrapolate their lifetime value. That opens up all kinds of doors, like figuring out how much it’s worth to pay to acquire a customer.
6. Inertia is in your favor
It’s a fact: Subscription customers are more satisfied than non-subscription customers. They are also more loyal and more engaged. And whether you are providing great value from a retail subscription or offering great service on a monthly IT contract, inertia is in your favor. Switching is hard for customers once they are tangled up in your business. This creates a moat that can fend off competitors. It also lets you go on the offense against your competitors more easily.
7. More attractive to investors
Any business with the predictability and consistency of recurring revenues automatically becomes more attractive to prospective investors — or acquirers. The numbers are in black and white. There is less guesswork. There’s no wishful thinking. Just show them the spreadsheet! No matter what your goals, recurring revenue will help you more easily achieve them.
That’s my top 7. I’m sure you have some ideas of your own for why recurring revenue is so important. Recently, we did a webinar with some small business leaders who valued recurring revenue. I’ll talk about how they moved from transactional to recurring revenue models in Part 3 this series.
Kim Folsom is the founder and CEO of Founders First Capital Partners, which has helped accelerate the success of hundreds of small, service-based, business-to-business companies since 2015. Visit our website to learn more.